Halliburton’s 2014 guidance: Why HAL expects more drilling

Based on customer surveys, HAL expects global drilling and completion spending from the upstream energy industry (which drives revenues for oilfield service companies) to be up by “mid to upper single digit percentages” in 2014 compared to 2013, with generally higher spending in the Eastern Hemisphere and lower spending in North America. Halliburton expects its own revenue growth will exceed the market growth rate, with revenue increases approaching double digits in North America and the Eastern Hemisphere. Overall, HAL expects double-digit EPS growth in 2014 versus 2013. The company also guided to 2014 capex of ~$3 billion, about flat with 2013 capex. International capex is expected to be greater than North American capex in 2014. Depreciation is expected to be ~$2.2 billion. Based on HAL’s guidance and the outlook for the oilfield services industry, Wall Street analysts’ expect EPS of roughly $4.00 per share in 2014.

Eastern Hemisphere (Europe, Africa, and CIS plus the Middle East and Asia)

For 2014, the Eastern Hemisphere is forecast to experience “low double-digit” year-over-year revenue growth, with quarterly margins higher on a year-over-year basis (1Q14 versus 1Q13). Margins are expected to average in the upper teens and approach ~20% by year-end. For 1Q14, the Eastern Hemisphere is forecast to experience an “upper single-digit” percentage increase in revenue, and a modest improvement in margins. Beginning in 2Q14, Eastern Hemisphere activity is expected to recover from seasonal impacts, with steadily improving margins through the year and full-year margins averaging in the upper teens. Spending in the Eastern Hemisphere will be driven largely by NOCs (national oil companies, which are companies that are majority-owned or completely owned by national governments). The areas that will lead growth include Saudi Arabia, Iraq, China, Australia, Russia, and Angola.

North America

For 2014, HAL expects average U.S. land rig count to increase modestly, with “mid-single digit” growth in North America revenue. The company notes that greater horizontal service intensity (larger wells with more fracking)—especially in the Permian Basin—increased use of pad drilling (multiple wells drilled on one site), and increasing activity levels in the Gulf of Mexico will be the drivers of North American revenue. HAL has a stated goal of a 200 basis point improvement in margins in North American in 2014. For 1Q14, HAL commented that severe weather would impact the quarter as well as some pricing pressure on contracts that are renewing in the beginning of 2014, which would ultimately result in revenues and margins in line with 4Q13.

Latin America

In Latin America, Halliburton commented that 2014 is likely to be a “challenging year,” with both Mexico and Brazil in “transition” states. Brazil deepwater drilling activity levels are lower than expectations and expected to get worse through the year. HAL stated:

“Petrobras [the company's main offshore customer in Brazil] has recently said the deepwater rig count for 2014 will be even less than the already depressed levels of 2013. The entire services industry in Brazil is looking for relief to the over-capitalization that has occurred there in anticipation of a much higher deepwater rig count. No relief has been forthcoming at this point.”

In essence, Petrobras contracted out a great deal of service equipment and operations. These are currently underused, which hurts companies such as Halliburton that offer these services.

In the region, 1Q14 is forecast to experience seasonal declines in revenue and margins that are more severe than normal given the amount of equipment that HAL has committed to Brazil that’s currently not being used, as well as a ramp-down of a project in Mexico. The company guided to a mid-teens sequential decline in revenue in 1Q14, with margins in the upper single digits. HAL noted that full-year revenues and margins would be difficult to forecast until it knows the outcome of negotiations with Petrobras. Plus, HAL is bidding on contracts in Mexico, for which it awaits formal outcomes. Due to the current weakness in Mexico and Brazil, HAL expects margins for Latin America to be in the upper single digits until activity recovers later in 2H14.